The EU Benchmarks Regulation (BMR) has been the occasion for a fresh round of compliance exercises as financial services firms ("supervised entities" in BMR terms) seek to understand the new law and to enumerate the actions they must take to comply. The practical exercise to determine compliance obligations ought not to involve epistemic quandaries, but the BMR has prompted some metaphysical hand-wringing nonetheless, as firms grapple with the deceptively simple question of whether they are "benchmark users" or "benchmark providers" for purposes of the new law. On its face, the question may be risible, but real consequences can result from the answer. So, why is it even a question?
The BMR defines various use cases that cover the activities of benchmark users, and those defined use cases implicitly contemplate rate-setting activities by benchmark users. On the other hand, the rate-setting activities involved inmaking use of benchmarks in today’s financial system (sourcing index data, making calculations, and so forth) bear some resemblance to the activity of providing benchmarks (sourcing input data, making calculations, and so forth). This resemblance has prompted firms to analyze, more assiduously than usual, whether their activities comprise regulated activity A (provision of a benchmark), activity B (use of a benchmark), or both, simultaneously. Many firms have undertaken the analysis and gotten comfortable with their understanding of the line, drawn in the BMR, between “use” and “provision,” but some firms remain on the fence.
The resemblance between users’ rate setting and administrators’ index providing is partly an artifact of low resolution language. The new legal term of art for indices happens to be the same as the industry’s customary term for index users’ derived reference rates: “benchmarks.” No matter how clearly the law distinguishes between use of a benchmark and provision of a benchmark, the complete lexical overlap between the new legal term of art and the pre-BMR industry jargon has a pernicious effect on conceptual clarity.
In my latest eBook, I urge the industry to adopt some new terminology—primary benchmarks vs. secondary benchmarks—to better distinguish between administrators’ index-providing activities (primary) and benchmark users’ rate-setting activities (secondary) since the new law has assigned the term “benchmarks” to the primary activity only. I also lay out an analogy for the industry to better illustrate the distinction between primary (provision) and secondary (use) benchmarking activities implicit in the new law. As Ali van Nes, Senior Director of Regulatory Solutions at FactSet, says, the analogy enables industry insiders to explain the new law in terms that even casual industry observers can understand.